In the 1993 blockbuster film Jurassic Park, Jeff Goldblum’s character, Dr. Ian Malcolm, explains chaos theory—commonly known as the butterfly effect—the concept that even the smallest events, like a butterfly’s wing flap, could set off a chain reaction with wide-ranging repercussions. “If there’s anything the history of evolution has taught us, it’s that life will not be contained,” he said. “Life breaks free, it expands to new territories and crashes through barriers, painfully, maybe even dangerously.”
In a recent Economic Compass outlook report, KPMG chief economist Diane Swonk references Goldblum’s lines from the classic sci-fi to illustrate how the war in Iran could send a ripple effect across the global economy, and ultimately weigh on American households amid an already-dire economic landscape.
Swonk lays out two possible scenarios for the war. The first, Swonk calls the “base case.” It imagines a world where the war continues for several weeks, keeping the Strait of Hormuz closed for that period. Yet in that scenario, President Donald Trump ultimately relents near the end of March and oil prices ease, but a “risk premium” remains assuming some oil production sites are damaged. The second scenario imagines a war extending for three to six months, with significant damage to regional oil production and infrastructure, sending oil prices north of $130 per barrel. In this scenario, oil prices would remain above pre-conflict levels for almost a year.
In the scenario where the war continues for months and oil production is severely hindered, Swonk predicts core inflation could rise 4.1% by the end of the year, a rate not seen since May 2023. But even in the base case, Swonk predicts a spike in inflation in the fourth quarter of 2026, rising 3.3% year over year.
The conflict in Iran piles another level of uncertainty on top of an already fragile U.S. economy. Oil prices briefly shot up to almost $120 per barrel Monday, their highest since 2022, a day after the hardline Ayatollah Mojtaba Khamenei was chosen as the successor to his late father, Ali Khamenei, as Iran’s supreme leader.
Aside from oil, the labor market has cooled, posting dismal numbers in February, with signs that even the most reliable sector for hiring, health care, is wavering. Inflation has also proved hard to bring down to pre-pandemic levels. And consumers are spending more cautiously (save for the ultrawealthy) constrained by rising food and energy costs. But even as Americans prepare to receive higher-than-average tax refunds, Swonk said it’s uncertain what route the U.S. economy will take in the near future.
“An oil shock against the backdrop of fiscal stimulus adds another layer of complexity,” Swonk wrote. “Much like we saw in the wake of the pandemic, those changes could trigger a longer-lasting bout of inflation, like the one which is still with us five years after it started.”
The butterfly effect
Oil production can’t simply be turned off and on like a light, as Swonk highlights. “The problem is that oil production in the Gulf states is shutting down,” she wrote. “It is easier to turn off that production than to ramp it up; the latter takes time and that is assuming only minor damage.”
The baseline scenario assumes the war could wrap up by the end of March. Though even with that timeline, oil prices could remain elevated for weeks as it takes significant time to ramp up idled production and address infrastructure damage. If the war continues for months, they could remain above pre-conflict levels until late 2026 or early 2027, according to the analysis.
It’s unclear when exactly the war will end, as Trump has offered conflicting messages as to his planned endgame. The president said Wednesday the war would end “soon,” telling Axios there is “practically nothing left” to target. But Iran has said it’s ready to fight a “long-term war of attrition,” signaling the war could extend beyond the framework Trump has suggested. On Monday, Trump said, ‘We’ve already won in many ways, but we haven’t won enough.”
Those repercussions would flutter out to other parts of the economy. Higher inflation would most likely sideline the Fed for longer, delaying further rate cuts until the beginning of 2027 if the war continues for months, according to the analysis. Elevated oil prices would also hinder growth, according to Swonk’s assessment. In the first scenario, the economist predicts GDP growth could dip below 2% in the last two quarters of 2026. That dip would be even more extreme given a longer war, growing at a rate of just 1% in the third quarter of 2026 and 1.4% in the fourth quarter, though paired with a modest rebound of growth in the third quarter of 2027, at 2.9% at an annualized rate.
Whatever ultimately plays out, Swonk cautions that the Middle East conflict is sure to impact the U.S. on one scale or another given the fragility of the current economy. “The butterfly effect offers a useful reminder: in fragile systems, small shifts can generate outsized and unpredictable consequences,” she wrote.
In the 1993 film « Jurassic Park, » Dr. Ian Malcolm, played by Jeff Goldblum, elucidates chaos theory, famously exemplifying the « butterfly effect. » This theory suggests that minor events, much like a butterfly flapping its wings, can trigger profound and far-reaching consequences. Malcolm’s assertion that « life will not be contained » speaks to both evolutionary dynamics and the unpredictable nature of complex systems. Recently, KPMG’s chief economist, Diane Swonk, referenced Malcolm’s insights in the context of the ongoing conflict in Iran, illustrating how geopolitical turmoil can reverberate across the global economy and significantly impact American households.
Swonk outlined two potential scenarios regarding the war. The first scenario, termed the “base case,” envisions a brief conflict lasting several weeks, during which the Strait of Hormuz remains closed. In this scenario, oil prices may peak temporarily but are expected to stabilize as political conditions change, with some residual risk affecting oil production. The second scenario foresees a prolonged war extending three to six months, resulting in substantial damage to oil production facilities and infrastructure, pushing oil prices beyond $130 per barrel. In this situation, Swonk predicts that elevated prices could persist for nearly a year following the conflict.
In the prolonged conflict scenario, Swonk warns of a significant uptick in core inflation, estimating an increase of 4.1% by late 2023—levels not witnessed since May of that year. Even the base case suggests an inflation spike, projecting a year-on-year increase of 3.3% in the fourth quarter of 2026. Such inflationary pressures complicate an already fragile U.S. economy, which is grappling with rising oil prices, stagnant job growth, and cautious consumer spending habits amid escalating food and energy costs.
As indicated in the Economic Compass report, oil prices recently surged to nearly $120 per barrel following the appointment of hardline leader Ayatollah Mojtaba Khamenei in Iran. This development adds another layer of volatility to the economic landscape. The labor market shows signs of cooling, with disappointing job numbers reported for February. Even the healthcare sector, historically a strong hiring market, may be exhibiting weakness. Amid these challenges, consumers are becoming increasingly cautious, particularly as tax refunds are expected to be higher than average.
Swonk emphasizes that the intricate interplay between an oil shock and fiscal stimulus could introduce a « longer-lasting bout of inflation » reminiscent of post-pandemic economic conditions. The complexities of navigating oil production further exacerbate the situation. Swonk notes that while shutting down oil production can happen rapidly, increasing it involves time and effort, especially if significant damage has occurred to infrastructure.
In the base case, although a quick resolution to the war is anticipated by March, persistently high oil prices could linger for weeks due to the time required to restore production capabilities. Conversely, an extended conflict could sustain elevated prices long into 2026 or beyond.
The timeline for the war’s conclusion remains uncertain, as President Trump has provided mixed signals about the endgame. He has indicated that the conflict would conclude « soon, » suggesting minimal remaining targets, yet Iran’s statements imply readiness for a prolonged engagement. This discrepancy feeds further uncertainty regarding the war’s impact on the U.S. economy.
The repercussions of elevated oil prices and sustained inflation could extend to broader economic growth, with Swonk suggesting that GDP growth may dip below 2% during the last two quarters of 2026. The outlook becomes even more dismal if the war drags on, with potential growth rates plummeting to just 1% in the third quarter of 2026 and 1.4% in the fourth. A modest recovery may emerge by the third quarter of 2027, with growth projected at 2.9% on an annualized basis.
Ultimately, Swonk articulates that the Middle Eastern conflict will affect the U.S. economy, albeit in varied and amplified ways, given its current vulnerability. Drawing on the insights of chaos theory, she asserts that in fragile systems, even small shifts can initiate profound and unpredictable consequences. Thus, as the geopolitical landscape remains tumultuous, the interconnectedness of global systems highlights the intricate relationship between conflict, economic stability, and consumer welfare, urging caution as the world navigates potential turbulence.
